Have We Entered a G2 World?

The Empire Club Presents

Mr. Kenneth Courtis Chairman, Starfort Investment Holdings, with: Have We Entered A G2 World?

Welcome Address, by Barbara Jesson President of Jesson + Company Communications Inc. and President of the Empire Club of Canada

September 13, 2017

Good afternoon, ladies and gentlemen. From the Royal York Hotel in downtown Toronto, welcome, to the Empire Club of Canada. For those of you joining us through either our webcast or our podcast, welcome, to the meeting.

Before our distinguished speaker is introduced, today, it gives me great pleasure to introduce our Head Table Guests.

I would ask each guest to rise for a brief moment and be seated as your name is called. At this point, I would ask the audience to refrain from applauding until all of the Head Table Guests have been introduced.

Head Table

Distinguished Guest Speaker:

Mr. Kenneth Courtis, Chairman, Starfort Investment Holdings

Guests:

Mr. George Cooke, Chair, OMERS Administration Corporation; Past President, Empire Club of Canada

Mr. Douglas Derry, Past President, Empire Club of Canada

Ms. Catherine Murray, Host, BNN’s Business Day PM and Market Call Tonight

Ms. MJ Perry, PhD Candidate in Theology (University of Toronto); Owner, Mr. Discount Ltd.; Director, Empire Club of Canada

The Honourable Bob Rae, Former Premier of Ontario

Mr. Michael Rolland, Chief Investment Officer, Private Markets, OMERS

Ms. Antoinette Tummillo, Director, Empire Club of Canada

My name is Barbara Jesson. I am the President of Jesson + Company Communications and the President of the Empire Club of Canada. Ladies and gentlemen, your Head Table Guests.

We are pleased to welcome a number of students from the Rotman School of Management at the University of Toronto and from Centennial College. Students, please, rise to be recognized. Thank you to TD Securities, Labatt Breweries and Mr. Discount for sponsoring our student table this afternoon

I am full of admiration for our guest speaker, today. He appears to have created a well-established beachhead in the Asian Pacific market when many of us are still trying to figure out who the players are and where the real opportunities lie.

As Canada struggles to find common ground to renew the North American Free Trade Agreement with our largest trading partner, many believe we must look to the east.

Last week, reporter, Kevin Carmichael, writing in Maclean’s, suggested that in July, Canada had a prelude to what our economy could look like if we failed to negotiate the NAFTA deal.

As automotive plants closed for extended periods to retool, Statistics Canada revealed that Canadian export of goods had slumped, and imports declined rapidly. According to Carmichael, the July trade report serves as a cautionary tale of what life could be like without NAFTA. It is anticipated that trade in cars, trucks and parts should rebound in the months ahead as carmakers get back to work, but he argues persuasively that, this summer, we had a glimpse of what happens when the free flow of goods in North America is disrupted.

While we focus on NAFTA, Canada has already begun the pivot to the east. This fall could see decisions on a China Free Trade Agreement and an updated TPP. Diversifying trade markets with access in Asia could offer major opportunities for Canadian business and also send a signal to the United States that while North American Free Trade Agreement is important, Canadian exports can go elsewhere. Still, Canadians have been trying to do deals, particularly in China, since the economic surge began there in 2001.

When I began my own business in 2002, one of my largest clients, a major Canadian company, had just entered in retreat a joint venture deal with a Chinese partner. We announced the deal with much fanfare and then, very quietly, two years later, the company closed its plant into retreat.

They had found that methods of doing business were too different from their own corporate culture.

Eastern inscrutability has become something of a cliché. Nevertheless, for many of us, the rules of the game will be very different from those we are familiar with as we build these new trade relationships.

Some years ago, I read what I thought was a fascinating reflection on how Asian design principles had won the race against leading western electronics manufacturers. The western approach to design had followed a functional model with buttons that clearly indicated exactly what they were intended to do—my dream, by the way. The Asian model, the sleek, shiny, black boxes, clean lines, a façade uninterrupted by any obvious buttons or switches, came to dominate the industry. It seemed to me, as I read this account, that it provided a metaphor that all that we, in the west, find so challenging about Asia.

Our guest, today, can help us to better understand these, I hope, and maneuver these unchartered waters. Ken Courtis is one of the world’s leading investment bankers, investment advisors, and analysts of Asian economies and business in Asia. He has led a number of large, international corporation transactions centred on Asia and pioneered several investment banking areas. Just to name a few examples, he led the successful opening and establishment of the Singapore REIT market, the groundbreaking natural gas transactions between China and Australia, the restructuring of Japanese financial institutions and the restructuring and listing as public companies of major Chinese firms, including PetroChina and the Bank of China. He has also successfully led privatizations, major investments and acquisitions in the telecom, energy, transportation, and financial sectors.

If that is not enough, Dr. Courtis is a councillor of the Asia Society of New York; a director of the Global Policy Institute; a director of the Asia Pacific Foundation of Canada; a member of the advisory boards of the Schulich School of Business Management, of Glendon College and of the Economic Strategy Institute, Washington; and he is a trustee of Singapore Management University.

He has lectured at Keio and Tokyo Universities, Japan’s two most prestigious international institutions. He is a member of the Advisory Council on Economic Growth, which advises the Government of Canada on major domestic and international economic initiatives.

Ladies and gentlemen, please, join me in welcoming Mr. Ken Courtis to our podium.

Ken Courtis

Head Table Guests, ladies and gentlemen—Barbara, that was such a beautiful introduction. If my mom was here, she would ask you to continue. My father would have wondered who you were talking about. I see people in the room that I have known for many years and many new friends. I am really happy to be in Toronto. When I got off the plane this morning, summer was here, finally. It is a beautiful day.

There is so much to talk about.

Someone, a little earlier today, before we started lunch, asked me how I got into this business. Actually, I started my career as an economist. You know about economists. I became an economist because I thought I did not have enough charisma to become an accountant. I can compete on that with any accountants in the room. You know about economists. There was this economist out hiking in the back country of New Zealand. It was springtime. He came across a flock of sheep. There were all these young lambs that were so cute. He wanted to take one home to his daughter. He went to the shepherd, and he said,

“If I can guess how many sheep you have in your flock, will you give me one?”

The shepherd looked at this guy, a city slicker, who probably thought that he could not even park his bicycle.

He said, “Yes, sure. Go ahead.”

The guy made a few calculations, and he said, “I think you have 179 sheep.”

The shepherd said, “What?”

The economist repeated, “I think you have 179 sheep.”

The shepherd asked, “How did you figure that out?

I do have 179 sheep.”

“Yes, I am an economist. I am good with numbers. I guess I won my bet.”

“Yes, yes, take one,” the shepherd said. The economist bent over and picked up one of the animals. He was walking off, and the shepherd said,

“Stop, stop. Wait a minute. Wait a minute. There is a problem here.

I want to figure out, really, what you studied at university.”

What a question, the economist said to himself. He said, “You will never figure it out.”

The shepherd said, “I bet you studied economics.” The economist said, “How could you guess that?” He said, “Because you picked up my dog.”

When my mom asked me why I left economics to go into investment banking, it was because I wanted to stop guessing and picking up a lot of dogs. There may be a few dogs in what I have to tell you, today, but I think this is a great time for us to be having this discussion for so many reasons. There is just so much going on.

This week, at the UN, we have virtually all of the leaders who are driving countries to reshape this world. Our prime minister is speaking, I believe, today. Trump gave his rocket man speech a couple of days ago. The presidency will be speaking later this week, and America and China are basically the two powers, increasingly, that are driving this world.

Someone said to me the other day, “Imagine the unthinkable. Imagine a world where China had a leader like Trump, where both countries had a Trump.” I think it is time for us to think a little bit more than maybe we have in the past about how we position this country as we do look ahead.

As we look ahead, we see extraordinary technological change starting to take place. If we were in Toronto in 1900, the streets would have been clogged with horses.

By 1915, they were almost all gone. I think that is the type of technological change that is at hand now. That overlaps with globalization. We may have, in the past, thought that China was all about cheap labour, but it is not anymore. China is out there working to drive these new technologies. Its ambition is to be a leader in many of these areas.

When Bob Rae first went to China—I believe it was 1986, Bob—the economy of Canada was significantly larger than the economy of China. Today, China’s economy is six times larger than that of Canada. They are growing at 7%, 6% a year. If you just continue to do the compounding— even if that falls to 5% a year—you can see where this goes over time.

We had a relationship with China that was nurtured, that was developed going back to the 1960s, the late 1960s. In fact, the country became the go-to supplier for wheat when the Chinese really got stuck on the international markets. We had a place and position in China.

A few years ago, when we started our commodity trading company, I went with the guys who trade wheat, to Sinograin, which is responsible for much of China’s long-term wheat supply and food supply, and we were talking and talking, and they said, “How does a guy from Goldman Sachs get involved in commodity trading?”

I said, “Well, I have been interested in commodities all my life. I am from Canada, a big country that does a lot of commodities.”

He said, “You are from Canada?” “Yes,” I said. He said, “Come over here. We want to show you our special room.”

He took me into this lovely room. It is called the Alvin Hamilton Room. Amazing, because in 1960, Alvin Hamilton, who was then our Minister of Agriculture, broke, effectively, the U.S. blockade on trading wheat with China.

China was going through an extraordinary famine at the time. All that credibility for our country was there and had been nurtured—Trudeau, Mulroney, Chrétien, Paul Martin.

Then, I think we went backwards for a decade. The Trudeau government, I think, rightly, has re-engaged with China. One of the first things they did was to join the Asian Infrastructure Investment Bank, which I will come to later, which I think was the right decision, a decision to put back on the agenda, a negotiation of a free trade and investment agreement with China.

If we are going to continue to be so deeply dependent on America, and we are always going to be dependent on America—the geography is such a great part of politics and economics—we are missing that other leg that we have to build with that part of the world that is going to be extremely dynamic, I think, still for many decades. And that is the Asian economies. The Asian economies are every day more driven by trade with China, investment from China, Chinese tourism, Chinese investment in technology and China’s deployment across Asia in building the Asian-wide infrastructure. The Chinese economy, as we think about it, is also changing very quickly. Think of it. In 2012, for example, the service sector was about 40% of GDP. Today, it is 52%, 53% of GDP. In 2006, the current account surplus was 10.4% of GDP; it will be 2.4% of GDP this year. Net exports have been a negative contribution to GDP of 9% over the last 10 years. When I hear people say China is driven by exports, they are ten years out of date in their statistics. That new China service, domestic focus service economy, is going to be a great economy in which we can invest. All kinds of new companies doing things in new ways, different ways, are emerging. I see ahead of us a real cycle of great opportunities in that sector over the next decade.

The Chinese companies no longer are just focused on China. I am on the board of a large U.S. industrial company, which, up until three years ago, had always increased profits, every year, every year. We have 76 factories in China. Then, it is like we hit a brick wall. Profits fell, and then they fell further. The easy explanation is that the Chinese government is making it tough for foreign companies. It happens that the CEO of this company had worked in Asia in the 1990s.

He sort of continued to be very interested in this and how Asia was changing the world economy and what it meant for his businesses. He said that is too simple of an answer.

The company took a very deep analysis, made a very deep analysis of what is happening. This is what they found out.

Number one, they had never put their best people in China. They sent problem managers. Number two, they always saw China as a source of cheap labour or, in other words, low cost, so they had never invested in technology in China. They found that their Chinese companies had passed them in many ways, from a technological perspective. Number three, they had designed their products essentially for the U.S. market. You can go to Belgium or Canada and say, “We are not going to adapt this to your market; you are too small. Take it or leave it.” You cannot do that with China anymore. You could do that with China 20 years ago; you cannot anymore. It is big enough now. It is dynamic enough now. Plus, you have the Chinese companies saying, “Yes, we are going to adapt the products. We are going to make the products the Chinese need.” Fourth, Chinese companies, today, are doing increasing amounts of research, very much like the Japanese and the Koreans did before them. If I have a patent on this watch, they are not necessarily going to copy the watch, but they will put patents all around that watch, so that I cannot change it. That is a big issue. You need to set up research in China.

Another reason many companies have to set up research in China is because our universities and colleges are not producing enough people in science, technology, engineering, computers. A proportion of our students going into those sectors has gone down over the last 30 years. And of the proportion of those students who do still go to those disciplines, more and more of them have gone into finance than into manufacturing or other globally traded businesses, whereas the Chinese have a huge emphasis on engineering, math, physics, chemistry and science. They have a momentum on the research side that no one even imagined seven or eight years ago would be possible.

Also, today, the Chinese companies hire whoever they want to hire. If they want to hire you, and you are working for United Technologies, they will say, “We will pay you the same salary; we will give you share options; we will give you lots of opportunities; we will give you more opportunity, because you can run our company.” It is unlikely you are going to run United Technologies. If you still say no, they have other ways to convince you. They will go talk to your mother, talk to your father, talk to your boyfriend, your husband. It is a different reality we are dealing with today.

Another development that is fascinating is that Guangdong, this part of southern China near Hong Kong was a series of fishing villages. When Dezsö Horváth who is over there and runs what I think is a global service organization— Dezsö is centred at York University and sells education to the world—Guangdong was a series of fishing villages. Today, it is a metropolis of 30 million people.

What is happening today is really interesting. This is the centre of innovation increasingly in manufacturing. We are starting to see companies, startups, going to this region—companies from France, Germany, the U.S., starting up in Guangzhou. Once they get to a certain scale, then they migrate to Silicon Valley. All the Silicon Valley VC funds have big operations in this part of China as well. Their ambition is to turn that region of China into the equivalent of Singapore, but Singapore is only 6 million people. That is the other thing we have to deal with here, in China: The scale.

I look at this dynamism and this growth, and we, as a country, have to, I believe, have extremely tight relationships with America. Did not Talleyrand say that countries neither have friends nor enemies and that they only have interests? It is in our interest to have very good, positive, friendly relations with America. The Trudeau government, I think, has worked very nimbly on doing that with a mercurial president that we have, at the moment. I also think that we have to deploy a similar effort to have very tight relations with China, to be seen as relevant for China. It is tough, because they have a different system than we have. Frankly, they are not going to change their system because we asked them to change it. This is a Confucian culture where the state, for thousands of years, has been important in the economy, like it is in Japan, Korea, Taiwan.

How can I say this? China is too big to bully, and it is too old to seduce. I think we just have to deal with it as it is. It is no longer enough dealing just with China; we have to deal with global China. As you look at Southeast Asia, as you look through the Middle East, and if you look through Central Asia, China is the force that is driving those regions, increasingly.

I mentioned earlier that we joined the AIIB. If you think of it, the investment rollout in infrastructure across Asia over the next 15 years will be similar to what we have seen in China over the last 15–20 years. Think of it. China has built 80,000 kilometres of high-speed rail. It did not have any 15 years ago. They are the world leader in this sector, now. I can give you statistic after statistic, but if you think of the One Belt One Road project to modernize, in effect, the Silk Road across Asia into Europe, both the sea lanes and over land, we are looking at, I think, over the next 20 years, at $25 trillion of investment. You might say, well, where is that coming from? If you take the Asian Infrastructure Investment Bank—and George and I were sort of talking about these types of issues over lunch—they have $200 billion in callable capital, which they will lever 10:1, 11:1, 12:1. With interest rates where they are today, you have to be a little bit crazy not to take advantage of them.

Did you see last week that Austria issued 100-year bonds, 2.1%, 11 times oversubscribed? The Chinese are looking at this, and they are saying this is exactly the type of funding we need to build out the infrastructure. The New Development Bank, centred in Shanghai, which is founded by the BRICS economies, also has a capital base of $200 billion, $250 billion. The CEO of that told me he thought they could lever it 15–18:1. You start to see some numbers. The Silk Road Fund is going to be levered up to $1 trillion and so on and so forth. There is already a lot of money being prepared to be deployed, and, as this infrastructure is built, it will have a dynamic impact on growth and productivity throughout Asia. That, increasingly, will drive the world economy. Imagine that we are in Beijing, today, looking at the world. We have our back to the ocean, so we are looking west. What do we see? We see 600 million people in Southeast Asia, strong growth, 5%, 6%, 7% growth. We see through India at 6% this year—maybe 5%. They have been on 6%–7% growth for a while. We see central Asia with all the great resources. We see the treasure chest of resources, which is Russia. If we can build communication lines through these regions—both sea and land lines—we get into Eastern Europe and Europe itself and, through the Middle East, down into Africa. You are talking about 4 billion people. That is how the Chinese are looking at the world. Of course, trading with America and North America and Europe is critical for them, but they see also these relations balancing over the next few decades. That is the environment in which we are in today.

I wonder if, in history, in years, we might look back and say that the election of Donald Trump was a fluke, but, more deeply, in the social psychology of America, is Trump not a reflection of America coming to terms with its changing position in the world? Often, when you face a challenge, psychologists say first you sort of refuse it; it does not exist. There is disbelief. For a long time, in my discussions with world leaders, there are a lot of people who have all kinds of reasons for thinking that China would fail, like it is going to implode. They say, “It is going to be this; this cannot be happening; they do not have a system like ours, therefore, how can they be doing this?” Then, often psychologists tell us there is a period of anger. When Donald Trump speaks, you can feel that anger. Watch his rallies; you feel that anger. When he gave his speech at the UN, he mentioned sovereignty 21 times. He did not use the word ‘united’ once, other than when he said, “I am happy to be at the United Nations.” United Nations is a little bit about pooling sovereignty, to some degree. He is going the other direction. Thirdly, you come to accept reality before you embrace it. I am of the school of let-us-get-over-the-first-couple-of-steps-quickly, so we can get on to accepting realty and then seeing how we can embrace it to our advantage.

I think, in the past, in this country, there has been a lot of discussion about how China is a different system. Shall we accept Chinese investment? They have a human rights record, which is different from ours. They are threatening. It is so far out of our mindset. I think we have to also look at those issues a bit differently in a sense that that is the reality. We would like it to change. We would like to see some type of convergence, but I think you are never going to see a convergence between that culture and our culture. You are not going to see a convergence between the German culture and the Canadian culture, so why would you expect to have a convergence? The systems will be different. They will always be different. We just have to play with that and deal with that.

I think that if we were to do opinion polls, we would see that Canadian people are coming around to see that. I think the election of Trump has opened people’s eyes to the need to have a broader set of relationships. Actually, I would not be surprised, in opinion polls today, to see a small minority of people who see China as a threat. I would not be surprised if the same amount of people would see Trump in the United States as a threat in what he is doing and how it is playing the international system. I think there are more and more Canadians who understand and accept that we have to have two legs to walk and that, if we are going to continue being a strong trading nation, we have to engage with those people who are growing quickly in the world economy, who are innovative.

Today, the cultural capital of the world, heaven forbid, is probably Los Angeles, Hollywood. Who knows? Maybe 50 years, 75 years, it will be Shanghai. One thing I think we can focus on a lot more—and, again, people in the universities who are here are doing this, but you are the converted—is getting more of our students to study in these regions, learning the languages. How many Chinese students are studying outside of China, at the moment? I think it is about 300,000 a year who go abroad. Many of these students are coming back, and they are bringing the values and practices they learned in the west and elsewhere back. They will also maybe have more impact on change than we will pushing them.

Jiang Zemin said to Bill Clinton, in a meeting, when Clinton said, “You have got to do this; you have got to do that,” “Mr. Clinton, why are you so impatient? We are sending so many students abroad that in 25 years all of the people running China will have been educated in America.” I think we have to also look at these things from the perspective of time. Technology does not leave us a lot of time because it is forcing us to change. I think, when I listen to political and economic debate, it reminds me of this pre-Darwinian theory of spontaneous generation. It is as though people think we just spontaneously emerge from swamps or something and political events just spontaneously emerge. Really, no, they have a context. They have a history. We have to engage that history and context, and we have to be sure to not change from day to day, to fix our objectives and stick to them. We have to adapt as things evolve, but come hell or high water, there are three or four things that we really have to do and this engagement with Asia, in particular with China, is, I think, at the top of the list. Barbara, I know we do not have a huge amount of time, but if we have time for questions, I would be very happy to take a few. Thank you.

Questions & Answers

Q: Thank you very much for your very inspiring presentation. I have a question concerning the diasporic input of the Chinese-Canadian community in Canada and how that would impact our relationship— Canada with China—because you talked a great deal about how we have to think outside the box. But we have had a growing community that has had a link with China for a couple of years now. I am just wondering if you could talk about this sort of link that we could actually strategically use in our trading.

KC: Are you talking about the Chinese immigrants living in Canada?

Q: Yes, because you talked about the Chinese international students coming into Canada or even the United States. Thank you.

KC: I understand. I see two parts to that question. Let me take what you said first. Dezsö, what portion of the students at Schulich are from China? Is it 20%, you said, 22%?

What portion of those students stay in Canada after they graduate? Almost everyone.

DH: For a while according to Canadian policy for foreign students, plus they want to get more experience. Based on that, the alumni chapters we have in China are huge.

They are coming here, studying here. They learn more and then go back.

KC: Got it. One of the issues this country faces is that the population is aging and is not growing quickly enough, so we probably need a little more immigration. One of the sources could be these foreign students who come here and get great educations, stay here, and they learn about our culture and then, as Dezsö was saying, they have business contacts and go back to their country. That is a long-term investment, but is a great way to build relationships.

The other way is these students stay forever, and they get jobs in our companies and they, then, become point people for these relationships. Those two drivers, together, I think could make a difference.

Then there is another group of Chinese people in this country—because we are a country of immigrants—who have an intense relationship with China.

They are small-business type people. That is completely under the radar, but that is very intense. If you hold a meeting of the China Canada Business Council in Shanghai, you will have 3,000 or 4,000 people show up.

Q: I am not a businessperson, but I found what you have said fascinating. Given the difference in the negotiations that are going on and the dialogue, how much influence will that Chinese culture have on us in terms of respecting of the elderly and the closing of the income gap?

KC: Once, we had a basketball team when I was living in Tokyo, at Goldman Sachs, and we had a little league among other banks. One day, we had to choose the captain of the team. I had in mind one person who was a great player, and everyone got together, and they finally said, “Oh, no, it is you, Courtis, it is you.”

I said, “Why me?” “Because you are the oldest.” I see that when western companies have an Asian CEO from China, Japan or Korea, in particular, whom they cannot really fire but whom they do not want as CEO anymore, they promote him to be chairman. In the west, you would say he or she is being kicked upstairs.

In China, he just has more power. And so that position becomes even more problematic. Inevitably, if we interact more with cultures that are different than ours, we learn more about ourselves because we learn more about them. They have some values that are very positive that can be part of our culture and some that do not fit our culture. That is how I would answer your question.

Q: I have a question, Ken. We have been into China since 1983 to deliver the first MBA program in China. Then, the world went to China. Chinese did not have to adjust to the rest of the world, the languages, the cultures. The rest of the world had to do that. I see a shift happening now. If you take, for example, the agriculture situation, they are increasingly buying lands in different part of the world, Africa, Russia and so on. They made a mistake. They implanted a lot of Chinese workers in those countries, which created not a good perception of the Chinese.

I think they are starting to adjust. They are also moving up in the product categories. They are going to more advanced products. In that case, I can do what they have done with Volvo—they finance Volvo, but let Volvo run the company, design the cars, as I understand. I think, increasingly, China had tools to reach out to the world. That is what I see that we are now training people in China and back here.

They want to learn about foreign cultures. They want to learn languages beyond English.

Is that a more clearly emerging recent trend?

KC: I did not address this issue. It is a complex issue.

It is, first of all, an issue about Chinese investment abroad. Even now, China is still getting $100, $110, $120 billion direct foreign investment from outside, but I think we should expect China, over the next 20 years, to be investing $100 billion, $115 billion, $120 billion outside. This is one of the great pools of capital. We, as a country, have to come to terms with that. Remember, we had a third-tier energy company that had three-quarters of its assets outside of Canada, and we had a psychodrama—it is called Nexxon—that the Chinese company could buy it for $6 billion more than it was worth. At the same time, a company called Viterra, which was our only company still at the top end of the food chain in commodity trading, was picked off by Glencore, and there was not an article in the newspaper about it—a bit strange. We are going to see that if we want foreign investment—we wanted foreign investment in the 1980s. There was America and Europe, and we had to then focus on Japan. We did that, and we got a lot of Japanese investment. I think we need to make the same focus today. But we have to understand that much of—well, 30% of China’s economy is run by big state companies, and much of that investment or some of that investment will come from state companies, so we will have to come to terms with that and deal with that.

Secondly, as Professor Horváth was saying, China is going out, today, to learn as much as it can from the rest of the world, but also to invest in technologies that it wants to get for its development. It has a population today that is now more than 50% urban, and it is urbanizing at the equivalent of one new New York City every year, so there is less and less agricultural production, domestically, so it will be taking more food.

Great opportunity for us. It will be about setting up operations abroad. Chinese companies will be setting up big operations abroad. That has not happened before.

Also, I think the Chinese will have new ways of doing business. One of the things that this U.S. company, on whose board I serve, discovered is that the Chinese competitors were using the internet much more aggressively in marketing and in the organization of their company and their operations, client management and sales. They will use new technologies in sort of a new way.

Remember the Chinese invented fireworks, and then, in the west, we had invented the technology to make bells with iron ore or copper. When those two technologies came together, what happened? We created canons, fireworks inside a canon. The Chinese might—because they are taking these technologies and they do not have a lot of baggage—leapfrog us. Surely, they will leapfrog us and develop new ways of doing things that we have not figured out yet. It is going in both directions, I would think, Dezsö. That is another reason I think we gained so much, by being focused on this and involved. We risk losing a lot by not being involved and focused.

Q: Dr. Courtis, thank you so much for underlining the importance of international education. As an educator, I know and I can attest, having been away for a while, that indeed we have been, in the last decade, lagging behind. Thank you for that comment. My comment would be in terms of the Canadians, as we are looking forward and working with the Chinese. Obviously, we want to deal in areas where we are the best in the class. You commented on the technology trade areas. Looking at the next five, ten years, what are the two, three, four areas—I am reading about AI, the medical field, et cetera—in which we are the best in the class such that we, unlike perhaps others, have something with which to work and trade with China?

KC: That is an interesting question. We have to look carefully at what we have today and what we can create and where we can be even stronger. I think one area is education, your area. If we want to influence more how China evolves as a business culture, there are lots of things that we could do through the education that is here.

I think another area—and George and I were talking a little bit about this over lunch—concerns that Canada, the government, has adopted legislation to create a Canadian Infrastructure Bank. If that were of sufficient scale, and then it somehow became related with the Asian Infrastructure Investment Bank and we created, through our scale domestically, a really ambitious program, like the building the national railways, then we would have companies of scale that could compete in this massive buildout of infrastructure in Asia. Those are a couple of the areas.

I was in Montréal recently, and I was just so surprised at how big the digital businesses were in Montréal and how much they are already deeply engaged in China. I did not realize there are three nonstop flights between China and Montréal now. Three years ago, there were none. It is moving. I know that Boeing will not be happy with this, or maybe the U.S. government would not be happy with this, but Bombardier could do a big joint venture with a Chinese company. There are some of the areas in which I think we could move in. I am sure there are many others that we would think of if we brainstormed. I see the ladies are very dynamic on the question side here.

Q: Ken, laced through your comments were references to high-tech enterprise, emerging and growing, and it certainly resonated with me because I have been involved in the fintech sector for a bit, and you certainly see them as top-tier competitors.

What I have a hard time reconciling is that trend, along with the R&D, which you indicate is supporting it, on the one hand, and the other hand, the enduring references to cyber-crime. In the financial space, people comment that cyber-crime—if you see both China and Russia as two major sources of the crime—has a very different makeup across those two countries. Russia is very much in destructive mode, and China is very much in the “get-the-IP” mode.

Two questions: Is that a fair characterization of the difference and, more specifically, if it has been, is it changing? Does China remain as dependent on IP theft as it might have 10, 15 years ago?

KC: I am on a board of a company that is highly evolved in the tech space. We believe that nothing we do is secure after six months. Our competitors, wherever they are from, are constantly re-engineering what we do. It is not just China; it is everybody. It is not just Russia; it is everybody that is involved in this.

I was at a meeting recently, and we had the U.S. head of cyber—whatever it is called in the Pentagon—speak to us. He spoke for 45 minutes. It was all about China, a little bit about Russia, China, a little bit North Korea.

Also, the French are a little bit devious. Watch out for the Germans a bit. At one point, a Swiss participant in the meeting—a CEO of a Swiss company—got up and said, “I am listening to you. It is almost like America does not do any of this stuff. From what we know, America is the leader in this area.”

I was checking out of my hotel the other day, and the guy said to me, “Have you left anything behind?” I said, “Maybe Putin’s hiding under my bed.” The Russians are everywhere, right? Strangely, because two years ago, the Russians were about to collapse, we were told.

With the sanctions, Putin would be out of business. He would leave office. It is the case that when a country does not have something, it tries to get it any way it can. Now that China is developing its own tech industries—and some of these countries are just really strong—it is innovating. It is doing its R&D. Guess what? China is becoming really interested in IP protection. I think they will become a real supporter of IP protection.

What the criminal networks in Russia are doing and how they are related to government, I have no idea. I really cannot comment on that. What I do know, from everything that I can see, is that in the tech finance space, the Chinese are way ahead of us—in the fintech area. And they have a scale that is really, really significant. The issue now is can they take that technology and the models they have developed and deploy them internationally? If they can, then that is going to change how finance works around the world. Thank you very much.

Note of Appreciation, by George Cooke, Chair, OMERS Administration Corporation; Past President, Empire Club of Canada

On behalf of the Empire Club of Canada and all of us that are in attendance today, it is my privilege to thank Ken Courtis for what, really, have been incredibly both informative and thoughtful remarks. For a presentation that started with an economist struggling over the differences between sheeps and dogs, we have quickly, I think, run through an incredibly insightful overview of China cast in both Asia and a very changing world, one characterized with technological transformation and many political and cultural challenges.

Very clearly from the participation of the audience in the Q&A, Ken, people were both interested and engaged, and they understood the wisdom that you were sharing with us. For all of the above, I thank you very much and look forward to when we might next engage in this type of a discussion.

Thank you very much.

Concluding Remarks, by Barbara Jesson

Ken, thank you for being such a gentleman. I have been mispronouncing your name all day and you have not corrected me, but I have learned.

A sincere thank you to our sponsors, OMERS, for making this event possible. Without sponsors like these great companies, the Empire Club lunches would not be possible. We are extremely grateful for your generous support.

We would also like to thank mediaevents.ca, Canada’s online event space, for live webcasting today’s event to thousands of viewers around the world. Although our club has been around since 1903, we have moved into the 21st century and are active on social media. Please, follow us on Twitter @Empire_Club and visit us online at www.empireclub.org. You can also follow us on Facebook, LinkedIn and on Instagram.

Please, finally, join us for our next event on September 28th, with Jorge Araya, President and CEO of Imperial Tobacco Canada, in conversation with Mike Eppel, at One King Street West. Thank you for your attendance today.

This meeting is now adjourned.